At a board meeting last week I watched as the young startup CEO delivered bad news. “Our current plan isn’t working. We can’t scale the company. Each sale requires us to handhold the customer and takes way too long to close. But I think I know how to fix it.” He took a deep breath, looked around the boardroom table and then proceeded to outline a radical reconfiguration of the product line (repackaging the products rather than reengineering them) and a change in sales strategy, focusing on a different customer segment. Some of the junior investors blew a gasket. “We invested in the plan you sold us on.” A few investors suggested he add new product features, others suggested firing the VP of Sales. I noticed that through all of this, the lead VC just sat back and listened.

Finally, when everyone else had their turn, the grey-haired VC turned to the founder and said, “If you do what we tell you to do and fail, we’ll fire you. And if you do what you think is right and you fail, we may also fire you. But at least you’d be executing your plan not ours. Go with your gut and do what you think the market is telling you. That’s why we invested in you.” He turned to the other VC’s and added, “That’s why we write the checks and entrepreneurs run the company.”

Investors bet on a startup CEO to find the repeatable and scalable business model.

Unlike the stories in the popular press, entrepreneurs who build successful companies don’t get it right the first time. (That only happens after the fact when they tell the story.) The real world is much, much messier. And a lot more interesting. Here’s what really happens.

Observe, Orient, Decide and ActWhether they’re using a formal process to search for a business model like Customer Development or just trial and error, startup founders are intuitively goal-seeking to optimize their business model. They may draw their business model formally or they may keep the pieces in their head. In either case founders who succeed observe that something isn’t working in their current business model, orient themselves to the new facts, decide what part of their business model needs to change and then act decisively.

Pivoting the Business Model
What happens when the startup’s leader recognizes that the original business model model is not working as planned? In traditional startups this is when the VP of Sales or Marketing gets fired and the finger-pointing starts. In contrast, in a startup following the Customer Development process, this is when the founders realize that something is wrong with the business model (because revenue is not scaling.) They decide what to change and then take action to reconfigure some part(s) of their model.

The Customer Development process assumed that many of the initial assumptions about your business model would probably be wrong, so it built in a iteration loop to fix them. Eric Ries coined this business model iteration loop – the Pivot.

(One of the Pivot’s positive consequences for the startup team is realizing that a lack of scalable revenue is not the fault of Sales or Marketing or Engineering departments – and the solution is not to fire executives – it’s recognizing that there’s a problem with the assumptions in the initial business model.)

Types of Pivots“Pivoting” is when you change a fundamental part of the business model. It can be as simple as recognizing that your product was priced incorrectly. It can be more complex if you find the your target customer or users need to change or the feature set is wrong or you need to “repackage” a monolithic product into a family of products or you chose the wrong sales channel or your customer acquisition programs were ineffective.

If you draw your business model, figuring out how to Pivot is simpler as you can diagram the options of what to change. There are lots of books to help you figure out how to get to “Plan B,” but great entrepreneurs (and their boards) recognize that this process needs to occur rapidly and continuously.

Operating in Chaos + Speed + Pivots = SuccessUnlike a large profitable company, startups are constrained by their available cash. If a startup does not find a profitable and scalable business model, it will go out of business (or worse end up in the “land of the living dead” eking out breakeven revenue.) This means CEO’s of startups are continually looking to see if they need to make a Pivot to find a better model. If they believe one is necessary, they do not hesitate to make the change. The search for a profitable and scalable business model might require a startup is make multiple pivots – some small adjustments and others major changes.

As a founder, you need to prepare yourself to think creatively and independently because more often than not, conditions on the ground will change so rapidly that your original well-thought-out business model will quickly become irrelevant.

SummaryStartups are inherently chaotic. The rapid shifts in the business model is what differentiates a startup from an established company. Pivots are the essence of entrepreneurship and the key to startup success. If you can’t pivot or pivot quickly, chances are you will fail.

Pivot.

Lessons Learned

A startup is an organization formed to search for a repeatable and scalable business model.

Most startup business models are initially wrong.

The process of iteration in search of the successful business model is called the Pivot.

Pivots need to happen quickly, rapidly and often.

At the seed stage, microcap funds/ superangels understand that companies are still searching for a business model – they get Pivots.

Most of the time when startups go out for Series A or B round, the VC assumption is that a scalable business model has already been found.

Pivots are why startups must be agile and opportunistic and why their cultures are different from large companies.

53 Responses

Another great post, and once again I have another fighting analogy. This is from the fights last saturday. Matt Hughes vs Renzo Gracie, Matt won the fight, and in the post fight interview, they asked him if he fought according to plan, Matt’s answer: “Not at all, I thought I would out box him, but he was too fast for me, so I decided to try the kicks”.

Somewhere in the first round, Matt the CEO/Founder of his body decided to pivot, literally and figuratively in this case.

Fantastic post as always. I think a great analogy is poker when you’re the short stack up against much larger opponents. The short stack is much more likely to throw their chips in the center and make what is for them an extreme bet.

I’m sure this is an over-simplification, but if a company was built to sell green pens and its first customer explains that they love the pens but want them in blue, the entrpreneur’s response should be “how many blue pens do you want?”

Change in the world of business is constant, in fact, it’s the only constant. “Pivoting” is an inherent and practical activity/response to the pragmatic aspects of the entrepreneurial experience – from development stage, to startup, to maturity, etc.

Recognizing the nature of this dynamic process helps all entrepreneurs in their quest for discovering viable business models that will, over time, naturally require adjusting as the marketplace creates a direction that is often different from the course that any given venture originally set out on, or may currently be on.

As Betty Davis once said, “strap yourself in boys and girls, the ride is going to get a little bumpy.”

Steve, do you recommend establishing a consistent tempo for pivot decisions, or do you just pivot whenever you think you need to?

Mostly this is a question about tempo for the business and management/communications to your team. Continual pivots can be indistinguishable from management that just can’t make up its mind, especially to a Product Development team that’s heads down trying to build a product. At the same time, if you know that in a week or two at the scheduled Customer Development/Product Development synthesis meeting you’re going to pivot to a new direction, should you just go ahead and do it today?

Pivoting today and saving a week or two seems like the obvious choice. But I can also imagine that the disruption caused by decisions made “out of cycle” would lower morale, cause confusion, etc. so that productivity slows down and you end up losing time on the next cycle.

Pivots are not meant to be changes in feature sets or a new release of a product that expands on what you have already been doing. Pivots are meant to be actually quite dramatic in its impact on a business. If you go back to the business model diagram and take a look at the various components Steve talks about, a pivot would be dramatically changing one of these elements – changing the fundamental customer set you’re pursuing, scrapping your current direct sales model and using an inside sales model instead, or changing your product entirely to service a demand you’ve discovered along the way.

Evaluation of potential pivots is the process a management team goes through when it observes its current business model and asks itself “Is this as good as it gets?” That means not only taking a look at the way the business model itself is functioning but the size of the entire market that you’re pursuing. It may be that in an adjacent space, you have more attractive customers or that you can alter your product slightly and demand a significantly more attractive pricing model. This process is time consuming and if implemented, significantly disruptive to the company.

The management team should be *evaluating* the business model and available market size on a quarterly basis but a pivot as Steve has defined it here should only be *implemented* a handful of times.

Thanks Ann. I read this paragraph, especially the last sentence, to mean something different than what you’re describing:

If a startup does not find a profitable and scalable business model, it will go out of business (or worse end up in the “land of the living dead” eking out breakeven revenue.) This means CEO’s of startups are continually looking to see if they need to make a Pivot to find a better model. If they believe one is necessary, they do not hesitate to make the change. The search for a profitable and scalable business model might require a startup is make multiple pivots – some small adjustments and others major changes.

You’re saying only the “major changes” are really deserving of being called pivots. Maybe we’ll use the term “optimizations” for those “small adjustments” so that I don’t confuse things.

So, the answer to my earlier question is that optimizations and pivots should go through a communication and decision-making process, but one that’s relevant in size for the scope of change being considered, i.e. pivots go through a larger process (e.g. quarterly board meetings) whereas optimizations through some process that is smaller and happens more frequently (e.g. weekly cross-functional team meetings).

This is brilliant Steve – thank you. So many of these principles & steps can be applied to other kinds of collaboration. In this ever more connected age, one’s capacity to collaborate around a sweet spot of mutual benefit (solve problem/capture opportunity) is probably the most vital trait other than one’s top talent.

I’ve read many stories of people pivoting but have never seen a write-up on best practices for actually executing the pivot given how many people are likely to be shocked and disapproving (investors, customers, and employees).

I was part of one of the most successful pivots of recent years, Odeo changing from a small potatoes podcasting directory into Twitter. There was no plan other than keep mum about what was going on until we were sure Twitter was going to be better than what we were already doing.

Is it messy for everyone? Is the best practice to fail on your own terms and to ignore/avoid people who might be upset?

Also, when do you pivot and when do you spaz? In your story, they’re reusing existing assets, so that’s a pivot. But in our case, we built an entirely different product. That’s not a pivot, that’s a spaz.

Interesting topic. I would love to see some further exploration of the reactions the board members underwent. How typical is this mix of, “are you crazy?!” versus, “I believe in you, so give it a shot.”

At Aggregate Knowledge we lived through the story you told with one major difference. Our board was completely supportive and told us that we reached the conclusion faster than they expected us to.

We set expectations on when we would come up with a new plan and we did. There were many bumps (and bruises) along the way and we’re not out of the woods yet but man – we’ve got a lot better shot at success than if we stayed on our previos path.

Troy, the usual advice for pivots is “change one thing at a time.” So if you find you’re changing the product, the customer, the strategy, and toolset all at once, you’re probably in trouble.

But if you change one thing at a time, you essentially get to do a controlled experiment, and you can reuse much of the work that has gone before.

I was talking to a buyer last week, and realized—with a nasty shock—that our product wouldn’t be enough by itself, and it needs to be bundled with some overly expensive services. So we need to tackle the price of those services, and try to bring them down. Not what we set out to do, but there’s not a lot of choice if we want a good sales pitch for our main product.

Makes sense, thanks, Eric, that’s good advice. Especially given what Ann said about pivots, no one could make multiple changes of the size she’s talking about simultaneously anyway.

Good luck. As to your problem, I wonder if you could “open source” the services somehow. Check out Logoworks and AdMeld as potential jumping-off points. You guys would think of yourselves as a sales channel for someone else’s services, not a service provider yourselves.

Obviously I have no idea what your business is, really just wanted to return the favor. Cheers!

The willingness to recognize the root of a problem with the business model and correct it by iterative adaption has been drilled into my subconscious by now.

What I’m most concerned with is fostering my own, and my teams awareness to the clues that will help rapidly recognize systemic errors. Fred Wilson’s MBA Mondays have proven to be great tools for identifying key financial metrics and business priorities.

The complex creativity required is what makes the process of entrepreneurship so appealing, and dangerous. A severely wrong direction shift can cause you to run out of runway or derail team morale. Lack of action is even worse.

Steve: What advice do you have for first time (no track record) founders in landing sufficient funding to build a quality beta. We’re building the alpha on our own time and will then market and modify to build a user base. I can’t imagine a more compelling pitch than a fantastic ascent in user metrics.

As an experienced investor, before I would consider funding any venture I would require answers to the following three questions:

1. Why me?
2. Why You?
3. Why Now?

For myself, it’s somewhat of an audition and similar to asking one out to a party or dance – convince me why I should accept your invitation vs. others.

Lastly, where are you with your idea?

Using an aircraft as an example, is it still sitting on a blueprint or is it ready for departure and just needs the fuel to get it off the ground? If it’s waiting for depature I’d have a serious interest, if not, better to chat with family or friends.

Ian,
Hard to believe, but I had never heard of Boyd when I first started thinking about the Four Steps. After I gave a few talks (and before the book) multiple people recognized the pattern and pointed it out to me. After that I went back and read every scrap of Boyd I could get my heads on and all the biography’s. Amazing insights.

I’m proud to say that Customer Development is nothing more than an OODA Loop for entrepreneurs.

Steve you should take a look at the cynefin framework by Dave Snowden. See http://en.wikipedia.org/wiki/Cynefin
I think startups explore novel practice in chaotic environments and refine it into emergent practice for complex environments.

Yes, speaking from my experience with agile development, I think this is a fitting assumption. With a startup, you’re not following a recipe, but you’re in the processing of inventing that recipe.

“A startup is an organization formed to search for a repeatable and scalable business model.”
Found that thought really inspiring and true! We’ve already scrapped our entire business model once and made a fundamental change in direction with the second one. What I’ve learned so far from that is that you should only expect one thing in a start-up: change. And that’s probably a good thing.

Vivaty is a company that is similar to IMVU, however vivaty is shutting down on April 16 because they didn’t get the business model right. I wonder how IMVU’s business model differs from that of Vivaty’s.

“As one who has spent years making Vivaty a reality and then trying to make it a success, it pains me to announce that as of Friday the 16th of April, Vivaty.com will completely shut down. I apologize to our loyal users that this must be so. Vivaty.com is a rather expensive site to run, much more than a regular web site, and Vivaty the company has been running out of money for some time. Our business model was to earn money through Vivabux sales, but that has never come close to covering our costs. We tried for months to find a bigger partner that would support the site, but that didn’t work out. “

“The second rule of technology entrepreneurship is to identify valuable opportunities. One of the ironies of entrepreneurship is that, despite the motivation of the world’s entrepreneurs, we do not really need many new businesses. Established businesses are already meeting most market needs quite effectively because, in the absence of some sort of external change, someone will have figured out already how to satisfy the needs of potential customers. Therefore, to be a successful technology entrepreneur, you have to find an external change that creates an opportunity for a new business.”

“The third rule of technology entrepreneurship is to manage technological transitions. Entrepreneurial success is enhanced by starting a firm to transition from one technological paradigm to another because change in a technological paradigm undermines the advantage of established firms. For example, few entrepreneurs have ever been able to start new firms that challenge Kodak’s position in traditional film, but the shift to digital camera technology made it possible for many entrepreneurs to enter and compete with Kodak.”

I have had to pivot many times in my business. You learn to recognize what’s work quicker everytime you pivot. Change is pretty instant and you can see the next once things start to bog down or go the wrong way.

You make many good points in this post. I’ve been an avid follower of yours for a few years and have given away many copies of your book.

I work with a lot of emerging companies that are looking to find their market(s) and then to create systematic ways of growing them. In Fact, “The Four Steps to the Epiphany” was the inspiration for this web page I created: http://www.design-works.com/war. It speaks directly to the challenges companies face when trying to get through all of the noise and get through to people that can actually make decisions about their offerings.

Glad I saw this article!
presenting a business that was built with the idea of the pivot in mind but we didn’t have a phrase for it and now we also have a good reference to refer people to in addition to examples of companies that have successfully pivoted.
Most appreciated.

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